The Offer, Part Nine

What I learned from my fiasco.

Most of what I know about business I've learned by making mistakes and then figuring out the lessons they contained. Clearly my education continues, and it hasn't been cheap. I've spent about $425,000 just on legal and accounting expenses in connection with the aborted sale of my records storage, document destruction, and trucking businesses to Nova Records Management. But you know what they say: A smart person learns from his or her mistakes. A wise person learns from other people's mistakes. I guess that makes me smart. I hope I can help you be wise.

One lesson of this fiasco is obvious: In negotiating to sell your business, make sure you know how the buyer makes decisions and who the ultimate decision maker is. Ironically, I've long prided myself on my ability to identify that individual in any negotiation. I sure blew it this time. As I told you last month, I thought Nova's board had the final say, but it actually belonged to one board member who had veto power over the board's decisions. I would have known that if I'd asked enough questions in the beginning. Shame on me for not doing it.

I also allowed the process to drag on much too long. This negotiation didn't have to take seven months. I fell into the trap of thinking, whenever there was a delay, "Well, it's just another month, another week." I could have brought things to a head much earlier had I paid attention to the signs of trouble--specifically the signs that my understanding of the word agreement was different from Nova's. More than once, we agreed to change something, and then I got a draft contract from Nova's lawyers with the old wording intact. My wife, Elaine, saw the handwriting on the wall before I did. "If they're doing this to you now, how are they going to treat our employees after the sale?" she asked. It was a good question, but I didn't give it enough thought. I suppose that's because, like most entrepreneurs, I'm extremely goal-oriented. When I start something, I want to see it through. Long ago, I learned that when I invest in businesses I need to set a dollar limit in advance that will tell me when to stop investing. (See "Learning From Mistakes," June 2003.) I've now learned that in negotiations like this one I also need to set time limits.

That said, I can point to a few things that I did right, or rather that we did right. First and foremost, we did not let the deal interfere with the business. True, we did put off the decision about what to do when we run out of space in our warehouses. In fact, I decided to sell partly because I wanted to avoid having to deal with that issue. But that had no effect on our operations, which continued to thrive while my partner Sam and I focused on the deal. Maybe we should have gotten out of the way sooner. The business grew faster during those seven months than it had during any seven-month period in years. I give full credit for that to our management team, led by Louis Weiner, the company's president. It was that performance that allowed us the option of walking away from the deal in the end.

On the other hand, I give myself credit for having the discipline not to think too much about my future. I received many attractive job offers--including one from a professional dog poop cleaning service--but I told everyone I was making no plans because I didn't want to be disappointed if the sale didn't go through. As a result, I was able to pull out of the deal with minimal regrets.

There are, I realize, people who think I made a lot more mistakes than I'm owning up to. One of them is a guy named Mike West, who has a mergers and acquisitions firm in Tennessee. He wrote a scathing criticism of me in his blog, accusing me of everything from hubris to outright fictionalizing. While some of his facts are shaky--suffice it to say his blog entry wouldn't survive the fact-checking process that each of my columns has to go through--he raises a couple of points worth discussing.

West takes me to task for writing about the deal. "Confidentiality should be respected," he says. He goes on to contend that my columns were grossly unfair to Nova and suggests that the deal collapsed because its people got fed up with me and walked away. That's not true, of course. In fact, the buyers kept trying to resurrect the deal even after I made it clear that my decision was final.

Nevertheless, it's legitimate to question the wisdom and propriety of my decision to chronicle the saga in a national magazine and in almost real time. I've come to realize that writing about the deal made life much more difficult for the people who tried to put it together. For that reason alone, I wouldn't do it again, although I doubt I'll have much choice. In the future, I expect, any confidentiality agreement I sign will explicitly forbid me to write about what happens.

The truth is, I'm not sure I would have written about it this time if I'd thought in the beginning that I might actually sell the businesses. I figured we'd hit a roadblock much sooner than we did. It wasn't until very late in the game that I let go of my doubts and thought, "Hey, this is really going to happen." By then, the column had taken on a life of its own. We'd talk about it in our meetings. Occasionally, somebody would say, "You didn't treat us fairly in the article." If I thought the point was valid, I'd try to correct the impression in the following installment. Now, someone might argue that writing the column violated the spirit of the confidentiality agreement, but the people on the other side never asked me to stop, and I took a great deal of satisfaction knowing that my readers were getting something out of the experience.

West also criticizes me for talking about the deal with my employees. He is essentially advising owners to keep their employees in the dark about a major change that could have a huge impact on their lives. My company doesn't work like that. He further warns that if you talk to employees you take the risk that they'll tell the buyer about "hidden problems." But what happens after the sale when the buyer discovers the hidden problems and demands to be compensated out of the money the seller has put in escrow? It's an invitation to a lawsuit.

My friend Chris Howard, one of the leading M&A people in this industry, had a different criticism. He thought I hurt my negotiating position by not having other buyers in the wings. Had I gone through a bidding process--or "shopped the deal," as they say--I would have gotten a much better sense of the market. Even if I had ultimately chosen to sell to Nova anyway, I would have had more negotiating leverage. You don't get "good behavior" from potential buyers, Chris noted, unless they realize you have other options.

That's probably good advice. I certainly had many more options than I was aware of, as has become clear to me since the Nova deal fell through. I have been overwhelmed by the number of inquiries I've received from would-be buyers and investors. While I knew there was a lot of private equity around, I had no inkling of the level of interest in our industry. By sheer coincidence, my sale collapsed right about the time that the industry giant, Iron Mountain (NYSE:IRM), bought the third-largest company, ArchivesOne, for a multiple of EBITDA that I'm told far exceeds that of any previous acquisition in this sector. That leaves my company, CitiStorage, as one of a handful of independents capable of serving as a platform on which someone could build another major records storage and document destruction business. As a result, it could be worth 20 percent more today than I would have received from Nova.

So I have a lot of thinking to do. I intend to do most of it in Europe, where Elaine and I are going for a vacation. When I return, I will make my decision, which may be to do nothing. Whatever I decide, I won't be writing about it until the new deal--if there is one--is signed, sealed, and delivered. (Instead, I'll be writing the columns I've been putting off while this series played out.)

Another thing I won't be doing is worrying about that warehouse problem. A week before I pulled out of the Nova deal, we got a call from someone at a location in Brooklyn that I'd always thought would be the ideal site for the new warehouse. It had never been available. Now the caller informed us that the space had opened up. Were we interested? Yes, we were--but we could say yes only because we hadn't yet made a commitment to another location, probably one in New Jersey. And we hadn't made a commitment only because we thought we had a deal to sell the companies. The funny thing is, I happily would have spent $425,000 in legal and accounting fees if I'd known it would buy me the opportunity to build my next warehouse in Brooklyn.

So there you have it: A door closes, and a window opens.

Norm Brodsky (brodsky13@aol.com) is a veteran entrepreneur who still has six businesses, including a three-time Inc. 500 company. His co-author is editor-at-large Bo Burlingham.